Corporate Law

One of the most enduring debates in corporate law centers on why Delaware has become the dominant state in the market for corporate charters. Traditionally, two perspectives dominated the debate, the “race-to-the-top” perspective that sees competition among states as driving legal rules toward efficiency and the “race-to-the-bottom” perspective that sees competition among states as driving legal rules toward the interests of corporate managers. The two dominant perspectives have struggled to explain why approximately half of large companies incorporate in Delaware, while the other half incorporate in their home states. Whether the choices are attributable to the quality of state law, the characteristics of the companies themselves, or both has given rise to a large, but inconclusive empirical literature.

The integrity of shareholder voting is critical to the legitimacy of corporate law. One threat to this process is proxy “bundling,” or the joinder of more than one separate item into a single proxy proposal. Bundling deprives shareholders of the right to convey their views on each separate matter being put to a vote and forces them to either reject the entire proposal or approve items they might not otherwise want implemented.

In this Paper, we provide the first comprehensive evaluation of the anti-bundling rules adopted by the Securities and Exchange Commission (“SEC”) in 1992. While we find that the courts have carefully developed a framework for the proper scope and application of the rules, the SEC and proxy advisory firms have been less vigilant in defending this instrumental shareholder right. In particular, we note that the most recent SEC interpretive guidance has undercut the effectiveness of the existing rules, and that, surprisingly, proxy advisory firms do not have well-defined heuristics to discourage bundling.

This Article addresses the proposition advanced by academic and press commentators that European corporation law promotes stockholder welfare better than its U.S. counterpart. Those who express that view often point to the stronger rights afforded to stockholders under the laws of the European member states, including the non-frustration rule, the ability of stockholders to take direct action by calling a special meeting and replacing directors, and rules that aim to provide equal treatment for all target stockholders. But claiming that stockholders are economically better off as a result of the literal law on the books is akin to judging the Soviet Union’s protection of human freedom by reading its constitution. That is, if one looks only at the Soviet Constitution on paper, one might conclude that it was a model of liberalism because it provided for separation between church and state, freedom of speech, freedom of the press, and freedom of assembly. But in reality, the Soviet citizens were unable to exercise any of those rights. In an admittedly far less extreme way, the claim that European corporate law better advances stockholder welfare than the U.S. approach relies upon a similar misplaced emphasis on paper rights. This Article proposes that scholars who tout Europe as a stockholder paradise slight the social and regulatory context in which laws operate, and elide the fact that American corporate law creates a system where directors have an intense focus on generating stockholder profits.

The definitive agreement in mergers and acquisitions (“M&A”) transactions is one of the most heavily negotiated agreements in the field of commercial contracts. Besides establishing basic terms, such as defining the target and setting the form and amount of consideration, both buyer and seller attempt to allocate risk in order to achieve an acceptable level of deal certainty. Between an agreement’s signing and its closing, weeks, if not months, can pass as the purchaser performs due diligence and the parties obtain the necessary voting and regulatory approvals. In the interim, either the purchaser or the target may have a change of heart or a decline in performance. One way of allocating such risk during this period is through the use of a Material Adverse Change (“MAC”) or Material Adverse Effect (“MAE”) clause. In essence, MAC clauses allow a party to the agreement—most often the purchaser—to walk away free of penalty if the other party experiences an adverse change that is sufficiently material. However, despite the apparent simplicity of such clauses, vague drafting and a dearth of case law have made issues of interpretation exceedingly imprecise and unpredictable.

Shareholder voting, once given up for dead as “a vestige or ritual of little practical importance,” has come roaring back as a key part of American corporate governance. Where once voting was limited to uncontested annual election of directors, it is now common to see short slate proxy contests, board declassification proposals, and “Say on Pay” votes occurring at public companies. The surge in the importance of shareholder voting has caused increased conflict between shareholders and directors, a tension well illustrated in recent voting battles. For example, Carl Icahn’s hedge fund opposed Michael Dell’s 2013 bid to take Dell, Inc. private, claiming that the price offered was too low. After a prolonged election battle, a change in the election rules, and a small increase in the deal price, shareholders ultimately voted for the deal. In a similar vein, a 2012 Say on Pay vote by Citigroup shareholders against chief executive officer Vikram Pandit’s $15 million pay package led to his departure and substantive changes to executive compensation, after which more than 90 percent of the firm’s shareholders approved its proposed executive pay scheme. Yet, despite the obvious importance of shareholder voting, none of the existing corporate law theories coherently justify it.

This Article seeks to clarify the relationship between contract law and promises of privacy and information security. It challenges three commonly held misconceptions in privacy literature regarding the relationship between contract and data protection—the propertization fatalism, the economic value fatalism, and the displacement fatalism—and argues in favor of embracing contract law as a way to enhance consumer privacy. Using analysis from Sorrell v. IMS Health Inc., marketing theory, and the work of Pierre Bourdieu, it argues that the value in information contracts is inherently relational: consumers provide “things of value”—rights of access to valuable informational constructs of identity and context—in exchange for access to certain services provided by the data aggregator. This Article presents a contract-based consumer protection approach to privacy and information security. Modeled on trade secret law and landlord-tenant law, it advocates for courts and legislatures to adopt a “reasonable data stewardship” approach that relies on a set of implied promises—nonwaivable contract warranties and remedies—to maintain contextual integrity of information and improve consumer privacy.

Three scandals have reshaped business regulation over the past thirty years: the securities fraud prosecution of Michael Milken in 1988, the Enron implosion of 2001, and the Goldman Sachs “ABACUS” enforcement action of 2010. The scandals have always been seen as unrelated. This Article highlights a previously unnoticed transactional affinity tying these scandals together—a deal structure known as the synthetic collateralized debt obligation involving the use of a special purpose entity (“SPE”). The SPE is a new and widely used form of corporate alter ego designed to undertake transactions for its creator’s accounting and regulatory benefit.

The SPE remains mysterious and poorly understood despite its use in framing transactions involving trillions of dollars and its prominence in foundational scandals. The traditional corporate alter ego was a subsidiary or affiliate with equity control. The SPE eschews equity control in favor of control through preset instructions emanating from transactional documents. In theory, these instructions are complete or very close thereto, making SPEs a real-world manifestation of the “nexus of contracts” firm of economic and legal theory. In practice, however, formal designations of separateness do not always stand up under the strain of economic reality.

You are approached by a dear friend who says, “I have a terrific business concept—diamond mining in Siberia. Just a pickaxe, divining rod, and some elbow grease. It’s going to be terrific. The problem is, I need a little bit of cash to get it off the ground. Any interest? I can offer you a share of the company.” Although you know little about Siberia or investing, you decide to invest. He sends you a sixty-five-page LLC operating agreement for Sub-Zero Mining, LLC (“it’s mostly boilerplate”), which you review briefly and sign. You send it back to him, along with a check for your investment.

Six months later, having heard nothing from your friend, you run into him, and he is driving a brand-new sports car. You ask him, “How did the mining in Siberia go?”

“It was terrific,” your friend explains. “I have more money than I know what to do with!”

U.S. regulation of public investment companies (such as mutual funds) is based on a notion that, from a governance perspective, investment companies are simply another type of business enterprise, not substantially different from companies that produce goods or provide (noninvestment) services. In other words, investment company regulation is founded on what this Article calls a “corporate governance paradigm,” in that it provides a significant regulatory role for boards of directors, as the traditional governance mechanism in business enterprises, and is “entity centric,” focusing on intraentity relationships to the exclusion of super-entity ones. This Article argues that corporate governance norms, which came to dominate U.S. investment company regulation as a result of the unique history of U.S. investment companies, are poorly-suited to achieve the goals of investment company regulation. In particular, the corporate governance paradigm has given rise to a number of regulatory weaknesses, which stem from investment advisers’ effective control over investment company boards of directors and courts’ deference to state corporate law doctrine in addressing investors’ grievances. Accordingly, investment company regulation should acknowledge that investment companies are not merely another type of business enterprise with the same challenges and tensions arising from the separation of ownership and control that appear in the traditional corporate context. Toward that end, this Article contends that policymakers should view, and regulate, investment companies as an avenue through which investment advisers provide financial services (investment-advisory services, in particular) to investors–and should view investment company shareholders more as advisory customers than as equity owners of a firm. This “financial services” model of regulation moves past the entity focus of corporate governance norms and, therefore, permits dispensing with governance by an “independent” body such as the board of directors. More importantly, if adopted, this model would remedy some of the more significant problems plaguing U.S. investment company regulation.

In the early months of the financial crisis that started in August 2007, Citigroup suddenly had to take onto its balance sheet $25 billion of assets–which, due to subprime mortgage exposure, were worth on the market only a third the amount that Citigroup was required to pay for them. The reason for the appearance of these troubled assets on the bank’s balance sheet was a liquidity guarantee provided by Citibank from the time it originally sold the assets to protect short-term lenders from the possibility that their debt could not be refinanced at maturity. The Financial Crisis Inquiry Commission would conclude that such guarantees helped “bring the huge financial conglomerate to the brink of failure.”

The assets in question were collateralized debt obligations (“CDOs”), which package together a large number of loans and other debt products and use the income from those loans to pay returns to the investors in the CDOs. It is clear, however, that not all of the “loans” underlying Citibank’s CDOs were actual loans. Some of them were financial contracts called derivatives that promised payments based on the performance of a specific set of actual loans. That is, some of the underlying assets were not loans, but simply represented the promise of one financial institution to make payments to another.